Last spring I wrote this blog entry about global exhaustion of rights in the patent sphere versus in the copyright sphere, with an eye toward then-the upcoming U.S. Supreme Court case in Costco v. Omega. Briefly, Costco purchased Omega watches abroad in places where the watches were sold cheaply, then imported them into the USA, where Costco sold the watches for far less than Omega would have liked. Because the watches bore a tiny artistic design that was registered with the Copyright Office, Omega sued for copyright infringement and sought an injunction.
Costco argued that under the Copyright Act’s first sale provisions, Omega had exhausted its rights, but in 2009 the Ninth Circuit ruled that since the first sale occurred abroad, the those rights weren’t exhausted. The Supreme Court granted cert last spring and heard the case this fall.
Despite being a copyright case, Costco v Omega attracted the attention of the patent community. That’s because in a series of earlier cases dating back to 2001 involving patentee Fujifilm and the now-bankrupt Jazz Photo and its owner, Jack Benun, the Federal Circuit ruled that the analogous doctrine of exhaustion of patent rights only applies when the first sale occurs in the USA. The CAFC’s jurisprudence allows patentees to practice “price discrimination”, viz. to charge different prices for the same goods in different markets. Thus, for example, were a pharmacy in Detroit to send a truck south into Windsor, Ontario, and fill the truck with thousands of U.S.-patent-protected-but-Canadian-price-controlled pills, in the hope of then selling the drugs in Detroit at a higher price, the patentee’s rights would not be exhausted by the sale in Canada, and the importation of the pills into the USA would constitute patent infringement. A reversal of the Ninth Circuit’s decision could have meant a reversal of the CAFC’s case law as well.
Two weeks ago, SCOTUS handed down its decision in Costco, a 4-4 split, Justice Elena Kagan having recused herself because she had been involved in the case on behalf of the United States while still serving as Solicitor General. The split decision means that the Ninth Circuit’s ruling stands, and a first sale of a copyrighted work outside the US doesn’t exhaust the copyright holder’s rights in the USA. It also implicitly leaves the CAFC’s patent exhaustion case law intact.
There’s some speculation that this may not be the end of the matter: inasmuch as four of the justices thought the Ninth Circuit got it wrong, and Justice Kagan herself may be in favor of universal exhaustion of copyright, it’s possible that the Supreme Court may grant cert in a similar case in the future. It only takes four justices to grant cert.
If that comes to pass – and this is really reading tea leaves – I’m guessing the court would leave the doctrine in patent cases untouched. That’s because, on the same day the eyes of the patent community were focused on the Costco decision, few seemed to notice that the Supreme Court denied cert in a case in which the CAFC’s own patent exhaustion jurisprudence was in question. In May of this year, in Fujifilm v Benun – the sixth installment in this ongoing saga before the CAFC – the CAFC ruled, inter alia, that the Supreme Court’s decision in Quanta Computer v LG Electronics did not overturn the CAFC’s requirement (enunciated in an earlier Fujifilm case) that a first sale of a patented item must occur in the USA in order for the patentee’s rights to be exhausted. In other words, the Supreme Court was just presented with a case in which the CAFC’s exhaustion rule was front-and-center, and in which Justice Kagan didn’t have to recuse herself, and still it didn’t find the matter sufficiently interesting to warrant its review. .
For comparison’s sake, in Israel a patentee’s local sales of a patent-protected article exhausts his rights, but the question of whether foreign sales exhaust those rights remains open. In two Israel Supreme Court cases from the middle of 2001 (Bristol-Myers Squibb et al. v Minister of Health et al., High Court of Justice case no. 5379/00 and Rav Bariah v Beit Mishar et al., Civil Appeal 1636/98), the question was discussed, but in both instances the cases were decided on other grounds, with the court explicitly leaving the international exhaustion question open.
In short, both in the USA and in the Israel, it seems the courts still haven't exhausted exhaustion.